Shares in energy producer Santos Limited (ASX: STO) dropped nearly 5% on Friday after the company released its full-year 2013 earnings, suggesting that investors expected more from the company. The result was a bit of a mixed bag, but here are some of the key points investors need to be aware of.
Production was down, but sales revenue was up
Oil and gas production dropped 2% in 2013 to 51 million barrels of oil equivalent (mmobe), but Santos benefited from a 12% lift in sales revenue as a result of higher oil and gas prices. The average realised price per barrel of oil was $121, up from $113 in 2012. The two results contributed to a net profit after tax (NPAT) of $516 million – $3 million lower than in 2012.
Capital expenditure rose
Unlike Woodside Petroleum Limited (ASX: WPL) which reported a 52% decrease in capital expenditure for 2013, Santos increased expenditure by 28% to $4.1 billion as it continues to develop its two big projects Papa New Guinea LNG and Gladstone LNG. With PNG LNG set for completion later this year, capital expenditure is expected to fall back to $3.5 billion in 2014.
Big dividend increases coming
Growing production and increasing margins will result in an expected doubling of operating profit by 2016. This is great news for investors and comes with a commitment from management to increase the amount returned to shareholders with a 'progressive' dividend policy which will increase dividends as earnings grow.
Reserves dropped
Santos currently has proved plus probable (2P) reserves of 1,386 mmobe, slightly down on 1,406 mmobe held in 2012. This gives the company about 27 years' worth of production at 2013's production rate of 51 mmobe.
However given that the company is expecting to grow production to 80-90 mmobe by 2020, it could work out to be a lot less unless the company can add additional new reserves.
Foolish takeaway
Santos may still be the best long-term energy play on the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO). The company had a solid result for 2013 and is about to embark on a significant growth phase. But as reserves continue to get eaten away, Santos will also need to refocus to determine where the next phase of growth will come from to keep shareholders happy.
